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  • 2nd Circuit: Bank’s suit to recover RMBS losses is untimely

    Courts

    On February 6, the U.S. Court of Appeals for the 2nd Circuit affirmed the judgment of the district court dismissing, as untimely, a trustee’s breach of contract and indemnity claims related to losses resulting from alleged defects in mortgage loans. At issue are three pools of residential home mortgages that at the time of sale had an aggregate principal balance exceeding $3.4 billion. These loans were sold by a mortgage company to Lehman Brothers Holding Inc. and Lehman Brothers Bank FSB in 2006 and subsequently securitized into three trusts. In addition to the representations and warranties made and the remedies provided in the Mortgage Loan Purchase Agreements (MLPAs) and Trust Agreements, the mortgage company, Lehman, and the depositor entered into a separate Indemnification Agreement for each trust, which contained its own representations and warranties indemnification provision. Investors, including Freddie Mac, purchased certificates in the trusts.

    According to the court, Freddie Mac conducted a forensic review of the trusts six years after the sale, which allegedly revealed that an “overwhelming percentage” of the loans in the trusts breached the mortgage company’s representations and warranties (R&W). Shortly after discovery, the trustee submitted breach notices to the mortgage company, which did not cure or repurchase the loans.

    The Federal Housing Finance Agency (FHFA), as conservator for Freddie Mac, filed a complaint against the mortgage company asserting breach of contract and indemnification claims. After the FHFA dropped out of the litigation, the trustee filed an amended complaint that included two breach of contract counts and two indemnification counts—one seeking indemnification based on the MLPAs and Trust Agreements and another seeking indemnification based on the Indemnification Agreements.

    The mortgage company moved for summary judgment on the first three claims and moved to dismiss the fourth claim. The district court granted the motion. It found that the breach of contract claims were time-barred because the FHFA filed the summons with notice more than six years after the limitations period at issue, which begins to run on the effective date of the R&Ws. The court also found the trustee’s indemnification claim based on the MLPAs and Trust Agreements to be time-barred because it was “merely a reformulation of its breach-of-contract claims.” The district court dismissed the other indemnification claim based on the Indemnification Agreements as time-barred because it involved a new set of operative facts and thus could not relate back to the original complaint filed by the FHFA.

    On review, the 2nd Circuit affirmed the lower court’s decision. As to the breach of contract claims, the 2nd Circuit relied on two New York Court of Appeals cases: Ace Securities Corp. v. DB Structured Products, which held that the six year statute of limitations begins to run on the effective date of R&Ws, and Deutsche Bank National Trust v. Flagstar Capitals Market Corporation which held that an express accrual clause in a contract cannot delay the start of a limitations period under New York law. With respect to the third cause of action for indemnification under the MLPAs and Trust Agreements, the 2nd Circuit stated that absent unmistakably clear language in an indemnification agreement that demonstrates that the parties intended this clause to cover first-party claims as opposed to third-party claims, an agreement between two parties to indemnify each other does not mean that one party’s failure to perform gives rise to an indemnification claim. In reviewing the claim at issue in count three, the court found that the claim sought payment to the trustee arising from the mortgage company’s alleged breach of R&Ws, which is a breach of contract claim. The trustee argued that the indemnification section provided an independent remedy, but the 2nd Circuit rejected that argument stating that a claim is not independent if its success directly depends on the breach of the R&Ws in the MLPAs outlined in the contract claims. Finally, with respect to the fourth clause of action for indemnification, the 2nd Circuit held that this claim filed in 2016, would only be timely if it related back to the facts of the earlier claims, but since it arose out of different contracts it therefore could not relate back.

    Courts RMBS Second Circuit Appellate Indemnification

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  • 9th Circuit holds inclusion of state disclosure requirements violate FCRA standalone requirement

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    On January 29, the U.S. Court of Appeals for the 9th Circuit held that the defendant employer violated the Fair Credit Reporting Act’s (FCRA) standalone document requirement when it included extraneous state disclosure requirements within a disclosure to obtain a consumer report on the plaintiff, a prospective employee. The panel also concluded that the defendant’s form failed to satisfy both the FCRA and the California Investigative Consumer Reporting Agencies Act’s (ICRAA) “‘clear and conspicuous’ requirements because, although the disclosure was conspicuous, it was not clear.” According to the opinion, the plaintiff signed a “Disclosure Regarding Background Investigation,” and was employed for several months before voluntarily terminating her employment. Following her departure from the company, the plaintiff filed a putative class action against the defendant, alleging a failure to make proper disclosure under the FCRA and the ICRAA. The plaintiff claimed that the disclosure form included not only a disclosure as required by the FCRA stating that the defendant could obtain a consumer report on her, but also additional disclosure requirements for several other states.

    The district court initially granted the defendant’s motion for summary judgment as to the FCRA and as to ICRAA’s clear and conspicuous requirement, holding that the disclosure form complied with both statutes. On appeal, the 9th Circuit first rejected the plaintiff’s assertion that the disclosure form violated the standalone document requirements because it included all the application materials she filled out during the employment process. The panel declined to extend this principle to the FCRA’s definition of a “document,” stating that the employment packet was distinct from the disclosure form. However, the 9th Circuit cited to its 2017 decision in Syed v. M-I, LLC, which held that “‘a prospective employer violates Section 1681b(b)(2)(A) when it procures a job applicant’s consumer report after including a liability waiver in the same document as the statutorily mandated disclosure.’” Noting the statute’s plain language, the 9th Circuit concluded in Syed that the FCRA meant what it said—“the required disclosure must be in a document that ‘consist[s] ‘solely’ of the disclosure.’” Moreover, the panel stated that Syed considered the standalone requirement with regard to any surplusage, and that the “FCRA should not be read to have implied exceptions, especially when the exception—in that case, a liability waiver—was contrary to FCRA’s purpose.”

    The 9th Circuit also concluded that the district court erred in holding that the disclosure form was clear because the form (i) contained language a reasonable person would not understand, and (ii) the language combined federal and state disclosures, which would confuse a reasonable reader. However, the panel held that the disclosure form met the conspicuous requirement since the defendant capitalized, bolded, and underlined the headings for each section of the disclosure and labeled the form so an applicant could see what she was signing. Accordingly, the 9th Circuit affirmed in part and vacated in part the district court’s decision, and remanded the case for further proceedings.

    Courts FCRA Ninth Circuit Appellate Disclosures State Issues

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  • 9th Circuit holds defendant’s website and mobile app must comply with ADA

    Courts

    On January 15, the U.S. Court of Appeals for the 9th Circuit held that the Americans with Disabilities Act (ADA) applies to a national pizza chain’s website and mobile app “even though customers predominantly access them away from the physical restaurant” because the “statute applies to the services of a public accommodation, not services in a place of public accommodation.” According to the opinion, the plaintiff sued the defendant seeking damages and injunctive relief, contending that the defendant’s website and app did not work with his screen-reading software. The plaintiff requested that the court order the defendant to alter its website and app to comply with Web Content Accessibility Guidelines (WCAG) 2.0 and make it accessible to individuals with disabilities as required by Title III of the ADA. The defendant argued that the ADA does not apply to its online offerings, and that applying the ADA would violate its due process rights.

    Although the district court held that Title III of the ADA applied to the defendant’s website and app, it granted defendant’s motion to dismiss under the primary jurisdiction doctrine, stating that in order to “cure” due process concerns, it would require “meaningful guidance” on website accessibility standards yet to be issued by the DOJ in order “to determine what obligations a regulated individual or institution must abide by in order to comply with Title III.” On appeal, the 9th Circuit reversed the district court’s reliance on the primary jurisdiction doctrine, finding it to be inapplicable since waiting for the DOJ to provide guidance on accessibility standards would cause “needless” delay of a resolution the lower court could determine. Moreover, the fact that the DOJ has not articulated a website accessibility standard does not violate a defendant’s due process rights because the “ADA articulates comprehensible standards to which [the defendant’s] conduct must conform.”

    Courts Americans with Disabilities Act Ninth Circuit Appellate

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  • District Court allows TCPA action to proceed, citing 9th Circuit autodialer definition as binding law

    Courts

    On January 17, the U.S. District Court for the District of Arizona denied a cable company’s motion to stay a TCPA action, disagreeing with the company’s arguments that the court should wait until the FCC releases new guidance on what constitutes an automatic telephone dialing system (autodialer) before reviewing the case. A consumer filed a proposed class action against the company, arguing that the company violated the TCPA by autodialing wrong or reassigned telephone numbers without express consent. The company moved to stay the case, citing the FCC’s May 2018 notice (covered by InfoBytes here), which sought comments on the interpretation of the TCPA following the D.C. Circuit’s decision in ACA International v. FCC (setting aside the FCC’s 2015 interpretation of an autodialer as “unreasonably expansive”). The company argued that the FCC would “soon rule on what constitutes an [autodialer], a ‘called party,’ in terms of reassigned number liability, and a possible good faith defense pursuant to the TCPA,” all of which would affect the company’s liability in the proposed class action. The court rejected these arguments, citing as binding law Marks v. Crunch San Diego, LLC, a September 2018 decision from the U.S. Court of Appeals for the 9th Circuit that broadly defined what constitutes an autodialer under the statute (covered by InfoBytes here), and therefore, determining there was nothing to inhibit the court from proceeding with the case. As for the FCC’s possible future guidance on the subject, the court concluded, “there seems little chance that any guidance from the FCC, at some unknown, speculative, future date, would affect this case.”

    Courts TCPA ACA International Autodialer Ninth Circuit Appellate FCC Class Action

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  • Acting Director Otting says FHFA structure is unconstitutional, will not defend before 5th Circuit

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    On January 14, acting Director of the FHFA, Joseph Otting, filed a supplemental brief with the U.S. Court of Appeals for the 5th Circuit stating the agency will no longer defend the constitutionality of the FHFA’s structure in the upcoming en banc rehearing. As previously covered by InfoBytes, in July 2018, the 5th Circuit concluded that the FHFA’s single-director structure violates Article II of the Constitution because the director is too insulated from removal by the president. In August, while the agency was still under the leadership of Mel Watt, it petitioned the court for an en banc rehearing, challenging the constitutionality holding. Now, according to the supplemental brief, the FHFA states it “will not defend the constitutionality of [the Housing Economic Recovery Act’s] for-cause removal provision and agrees with the analysis in [the relevant portion] of Treasury’s Supplemental Brief that the provision infringes on the President’s control of executive authority.” The en banc rehearing, which will address the constitutionality issue as well as the plaintiff’s other statutory claims in the case, is scheduled for January 23.

    Courts Fifth Circuit Appellate HERA FHFA Single-Director Structure

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  • 3rd Circuit: Enrollment packet e-signature requires student to arbitrate claims

    Courts

    On January 10, the U.S. Court of Appeals for the 3rd Circuit held that a student (plaintiff) attending an online school (defendant) consented to an arbitration agreement and waiver of jury trial when she electronically signed an enrollment packet. According to the opinion, when the defendant moved to dismiss the plaintiff’s lawsuit and compel arbitration, the plaintiff argued that she did not realize the enrollment packet contained an arbitration agreement. She maintained that her e-signature was applied to the agreement without her permission. The lower court, however, granted the defendant’s motion to dismiss and entered an order to compel arbitration.

    On appeal, the 3rd Circuit agreed with the lower court in a non-precedential decision that her contentions that she was never presented with the agreement and that the defendant had applied an e-signature on file were insufficient to create an issue of material fact. It observed, “[t]he most reasonable inference we can draw from the evidence presented is that [the plaintiff] simply did not read or review the [e]nrollment [p]acket PDF closely before she e-signed it, which will not save her from her obligation to arbitrate.” The 3rd Circuit further noted that Pennsylvania allows electronic signatures as a valid way to register assent, and that a “physical pen and ink signature” is not required.

    Courts Third Circuit Appellate E-Signature Arbitration

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  • 3rd Circuit: Enrollment packet e-signature requires student to arbitrate claims

    Courts

    On January 10, the U.S. Court of Appeals for the 3rd Circuit held that a student (plaintiff) attending an online school (defendant) consented to an arbitration agreement and waiver of jury trial when she electronically signed an enrollment packet. According to the opinion, when the defendant moved to dismiss the plaintiff’s lawsuit and compel arbitration, the plaintiff argued that she did not realize the enrollment packet contained an arbitration agreement. She maintained that her e-signature was applied to the agreement without her permission. The lower court, however, granted the defendant’s motion to dismiss and entered an order to compel arbitration.

    On appeal, the 3rd Circuit agreed with the lower court in a non-precedential decision that her contentions that she was never presented with the agreement and that the defendant had applied an e-signature on file were insufficient to create an issue of material fact. It observed, “[t]he most reasonable inference we can draw from the evidence presented is that [the plaintiff] simply did not read or review the [e]nrollment [p]acket PDF closely before she e-signed it, which will not save her from her obligation to arbitrate.” The 3rd Circuit further noted that Pennsylvania allows electronic signatures as a valid way to register assent, and that a “physical pen and ink signature” is not required.

    Courts Third Circuit Appellate E-Signature Arbitration

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  • 6th Circuit holds elements of Michigan foreclosure process are collection efforts under FDCPA

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    On January 11, the U.S. Court of Appeals for the 6th Circuit held that a debt collector should not allow the essential elements of a Michigan foreclosure to proceed after receiving a dispute letter under the FDCPA. According to the opinion, in September 2016, a debt collector sent a notice to a mortgage debtor informing the homeowner it intended to foreclose on the property, and two weeks later it began the Michigan state foreclosure process. After the process began, and within 30 days of receiving the debt collection notice, the mortgage debtor sent a certified dispute letter to the collector, challenging the validity of the debt. After receiving the dispute letter, the debt collector posted a foreclosure notice on the property and published notices in the newspaper. The debt collector never sent the mortgage debtor a verification of the debt. The mortgage debtor filed suit against the debt collector alleging violations of, among other things, the FDCPA. The district court granted summary judgment for the debt collector, holding that as a matter of law, the FDCPA did not require that the debt collector verify the debt and that it had “cease[d] collection of the debt” pursuant to the statute. The mortgage debtor appealed, arguing the district court (i) erred in its decision to end discovery and consider summary judgment, and (ii) erred in its interpretation of the FDCPA and its finding that the collector ceased collection efforts.

    On appeal, the 6th Circuit rejected the mortgage debtor’s arguments that summary judgment was granted while there were outstanding discovery motions, concluding the debtor provided no evidence the debt collector failed to comply with discovery requests and noted that most of the motions were filed after discovery period expired. As for the FDCPA appeal, the court reversed the district court’s decision, concluding that, as a matter of law, the debt collector was required to intervene and stop the foreclosure actions that were put into motion prior to receiving the dispute letter. The appellate court agreed with the debtor that the newspaper advertisement and posted notice are necessary elements of the Michigan foreclosure process and therefore constituted “collection activity” under the FDCPA. Regardless of whether the debt collector personally took any actions after receiving the dispute letter, the appellate court concluded the debt collector had the responsibility to cancel any elements of the Michigan foreclosure process until it obtained sufficient verification of the debt.

    Courts Sixth Circuit Appellate FDCPA State Issues Foreclosure Debt Collection

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  • 9th Circuit: Fannie Mae is not a consumer reporting agency under the FCRA

    Courts

    On January 9, the U.S. Court of Appeals for the 9th Circuit held that Fannie Mae is not a “consumer reporting agency” under the FCRA and therefore is not liable under the law. According to the opinion, homeowners attempted to refinance their current mortgage loan two years after completing a short sale on their prior mortgage. While shopping for the refinance, lenders used Fannie Mae’s Desktop Underwriting (DU) program to determine if the loan would be eligible for purchase by the agency. Three of the eight DU findings showed the loan would be ineligible due to a foreclosure reported for the homeowners within the last seven years, which was not true. The homeowners sued Fannie Mae alleging the agency violated the FCRA for inaccurate reporting. On cross motions for summary judgment, the lower court determined that Fannie Mae was liable under the FCRA for furnishing inaccurate information because the agency “acts as a consumer reporting agency when it licenses DU to lenders.”

    On appeal, the 9th Circuit reviewed whether Fannie Mae was a consumer reporting agency under the FCRA and noted that the agency must “regularly engage[] in . . . the practice of assembling or evaluating” consumer information, which Fannie Mae argues it does not do. Specifically, the agency asserts that it simply provides software that allows lenders to evaluate consumer information. The appeals court agreed, concluding that Fannie Mae created the tool but the person using the tool is the person engaging in the act. The court reasoned, “[t]here is nothing in the record to suggest that Fannie Mae assembles or evaluates consumer information.” Moreover, the court noted, if Fannie Mae were found to be a consumer reporting agency, it would be subject to other FCRA duties to borrowers, which “would contradict Congress’s design for Fannie Mae to operate only in the secondary mortgage market, to deal directly with lenders, and not to deal with borrowers themselves.”

    Courts FCRA Fannie Mae Ninth Circuit Appellate Foreclosure Consumer Reporting Agency

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  • 4th Circuit affirms jury’s verdict clearing student loan servicer in FCA suit

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    On January 8, the U.S. Court of Appeals for the 4th Circuit affirmed a federal jury’s unanimous verdict clearing a Pennsylvania-based student loan servicing agency (defendant) accused of improper billing practices under the False Claims Act (FCA). As previously covered by InfoBytes, the plaintiff—a former Department of Education employee whistleblower—filed a qui tam suit in 2007, seeking treble damages and forfeitures under the FCA. The plaintiff alleged that multiple state-run student loan financing agencies overcharged the U.S. government through fraudulent claims to the Federal Family Education Loan Program in order to unlawfully obtain 9.5 percent special allowance interest payments. Over the course of several appeals, the case proceeded to trial against the student loan servicing agency after the 4th Circuit held that the entity was “an independent political subdivision, not an arm of the commonwealth,” and “therefore a ‘person’ subject to liability under the False Claims Act.” The plaintiff appealed the jury’s verdict, arguing the court erred by excluding evidence at trial and failed to give the jury several of his proposed instructions.

    On appeal, the 4th Circuit disagreed with the plaintiff, finding that the court correctly excluded the state audit, which determined the student loan servicer “failed its mission” with lavish spending on unnecessary expenses. The appeal court noted the audit was irrelevant to the only issue in the case: “Did [the servicer] commit fraud and file a false claim?” The appeals court also rejected the plaintiff’s jury instruction arguments, concluding that the court’s instructions substantially covered the substance of the plaintiff’s proposal and “sufficiently explained that the jury had to consider whether [the servicer’s] claims were ‘false or fraudulent.’”

    Courts False Claims Act / FIRREA Student Lending Appellate Fourth Circuit

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